The government plans to strengthen charity tax rules in a bid to prevent abuse and improve charity compliance, today’s Budget revealed.

In her first Budget speech, Chancellor Rachel Reeves committed to strengthening existing legislation to prevent the abuse of charity tax rules, with changes expected to take effect from April 2026 to give charities time to prepare. 

The Budget says the government will “support charitable giving by legislating to prevent abuse of the charity tax rules, ensuring that only the intended tax relief is given to charities”.

Alongside the Budget document, the government published a summary of responses to the previous government’s consultation on charity tax compliance, which was launched in April last year.

The document lays out a series of amended proposals to tighten compliance rules, which includes the introduction of sanctions for charities that repeatedly do not meet their filing and payment obligations, resulting in the withdrawal of tax relief.

The government plans to amend the Fit and Proper Persons Test to “enable it to better address poor compliance with tax obligations”, the document says. 

It adds that this will “provide a proportionate approach by addressing the risk, but giving charities the opportunity to correct it before sanctions are applied”.

Under the proposed change, a trustee and/or manager of a charity who has persistently failed to comply with the charity’s tax obligations, including the timely filing of returns, will fail the Fit and Proper Persons Test’s management condition. 

“HMRC will give the manager(s) opportunity to rectify their non-compliance but if this is not done it may require the manager to be removed, which may ultimately result in the withdrawal of tax reliefs,” the proposal says.

It adds that once failures have been corrected and systems have been implemented to prevent them being repeated, reliefs could be reinstated.

The government will implement a short-term education programme in collaboration with sector representatives to support these changes, the document says.

The proposals also include plans to introduce legislation to ensure that all charitable investments must be “for the benefit of the charity and not for the avoidance of tax”.

This would “simplify the rules” by implementing this requirement across all types of charitable  investment, the proposal says, adding that the government will work with the sector to ensure that all guidance reflects this.

The plans include bringing legacy income into the definition of “attributable income”.

The proposal says: “Legacy income could have attracted considerable relief for the deceased individual’s estate, so the government will legislate to bring it into the attributable income definition. 

“This will also have the effect of equalising treatment of income from an estate in the hands of the charity, as where the residual value of an estate is given to charity it is currently treated as attributable income.”

The government also plans to update rules in a bid to prevent donors from obtaining significant financial benefits from their donation.

“It is important to prevent charities benefitting from tax reliefs by passing those benefits back to a donor or a connected person,” the proposal says.

The changes will lower the bar for challenging a transaction, which is currently set by “financial advantage”. Under the proposal, this would change to “financial assistance”.

In addition, the current motive test would be changed to an outcome test, which the document says will “allow HMRC to consider a series of transactions in the round rather than a single transaction and allow for a more objective assessment of the result of the interactions between a donor and a charity”.

This raft of policy changes is expected to generate more than £125m in tax between 2026 and 2030, the Budget documents show. 

In 2026/27, more than £20m is expected to be generated by the changes, rising to more than £35m in subsequent years.

The government intends to publish a draft legislation on these proposals for consultation next year, with plans to introduce the legislation later in 2025 for introduction the following April.